It’s that time again, the earnings season in the US is in full swing. We took the opportunity yesterday and made one trade on Facebook (FB). How this trade was made and what result we achieved is explained in this news.
How to trade earnings
You may ask yourself, how can you trade earnings? Nobody knows what will be announced and what direction the stock will take. That’s absolutely right and we do not just go long or short and hope we’re right. We trade the earnings with options in a market-neutral way. We basically cannot care if the stock rises or falls, the main element is that the stock moves.
For this purpose, we deliberately chose stocks that are relatively expensive and have often shown large movements in the past after the earnings. Another advantage of our approach is the decay of implied volatility.
What did the earnings trades look like?
We use Reverse Iron Condors. These option constructs benefit both from a move and from the expiration of implied volatility.
Facebook Earnings Trade
In Facebook, we have set up a Reverse Iron Condor with the following strikes:
- Buy a Call at 157.5
- Sale of a Call at 162.5
- Buy a Put at 143
- Sale of a Put at 138
The entire construct costs $2.43 and we bought 5 pieces. The payout profile at maturity was as follows:
We have estimated the probability that Facebook remains unchanged after the earnings at $150 as very low. The profit and loss profile shown above shows that we can lose a maximum of $1,215. However, since we do not hold the trade until maturity, this case will never happen. Our realistic risk was around $750. The maximum profit, which was quite realistic, is $1,258.
After the significant movement that was in effect, we closed the trade today in a live webinar for $4.72. In this trade, we have made a profit of $1,002.
Today: Trade in Amazon
Today Amazon reports the quarterly numbers so we also want to make an earning in this title. All premium members will again receive the signal live and can discuss the trade with us. We look forward to all questions and an interesting discussion.